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Business grows in eurozone, companies cut prices

Oct 23 2015 12:20

London - Business activity picked up more than expected in the eurozone in October, buoyed by Germany and France, but with no sign of healthy price increases.

Survey data released on Friday should be welcomed by the European Central Bank (ECB), coming more than six months after it embarked on a €1trn quantitative easing programme to try to boost growth in the bloc.

What will disappoint policymakers, whoever, was the way companies cut prices again, after holding them steady in September and increasing them for the first time in more than three years during August.

The money-printing programme is also designed to lift inflation.

"The survey suggests that the eurozone recovery's modest pace continued into (the current quarter). But growth is still too slow to generate inflation and adds further support to our view that the ECB will increase the pace of its monthly asset purchases," said Jessica Hinds at Capital Economics.

Consumer prices fell in the eurozone in September, coming in at minus 0.1%.

The ECB, which wants to see inflation just below 2%, left monetary policy unchanged at its meeting on Thursday but said in December it would review what more it could do to tackle the threat of weak prices and growth.

Inflation is seen staying barely above zero this year and still missing the bank's target for the next two years, an ECB survey showed on Friday.

The prospect of another big hit of stimulus pushed world stocks to a two-month high and the euro to a two-month low on Friday.

Flash's rocket

Markit's eurozone Composite Flash Purchasing Managers' Index, based on surveys of thousands of companies and a good guide to growth, came in at 54.0 this month, up from September's 53.6 and above even the most optimistic forecast in a Reuters poll, which predicted a dip to 53.4.

The index has been above the 50 mark that separates growth from contraction since July 2013 and Markit said the survey pointed to fourth quarter economic growth of 0.4%, in line with a Reuters poll last week.

Germany's private sector grew for a 30th month running in October, suggesting Europe's largest economy got a solid start to the fourth quarter despite concerns about the Volkswagen scandal and a slowdown in China.

Activity among French firms accelerated, signifying weakness over the summer may have been a blip and that a recovery could be taking hold.

But some of that boost came from firms cutting prices again, with the eurozone composite output price index dipping back below break-even.

Still, the discounting helped the overall services PMI jump to 54.2 from 53.7, confounding expectations in a Reuters poll for a fall to 53.5. A sister survey covering manufacturers held steady at September's 52.0, also beating the median forecast.

A factory output index, which feeds into the composite PMI, dipped to 53.3 from 53.4 but manufacturers appeared to benefit from a weaker euro - it has weakened by 7% this year - as the new export orders index rose to a four-month high of 52.6.

"Since the survey indicates that private sector prices declined in October, the upbeat nature of this PMI will unlikely make Mario Draghi change his mind about possible December action," said Bert Colijn at ING.

"Within the new ECB strategy of 'work and assess', this will unlikely be assessed as a game changer."

ecb  |  eurozone  |  economy
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